In a Depression, Employment is a Fiscal, Not a Monetary Issue

This is the theme that we have been trying to illustrate for a long time, and have been focusing on since the QE2 talk started in early September. The fact that Washington lets Ben Bernanke run the world is a problem.  Obama’s economic team of Summers and Geithner have been weak on this issue.  Fortunately Summers is now gone, and I still feel Geithner needs to go also.  Seeing the movie “Inside Job” only reinforced that opinion. 

An article over the weekend on Reuters by Fed Governor Lacker reflects a lot of what I see at this juncture.

“Reuters) – The Federal Reserve might risk higher inflation if it focuses on efforts to bring down unemployment, Richmond Fed President Jeffrey Lacker said on Sunday.In a speech that hinted at his scepticism of the Fed’s latest efforts to stimulate the economy, Lacker, a vocal inflation hawk, said monetary policy can lower joblessness only temporarily.“Trying to keep unemployment permanently lower than it otherwise would be … is a recipe for continually accelerated inflation,” he said, pointing to the inflation experience of the 1960s and 1970s as a cautionary tale.With the jobless rate currently stuck at 9.6 percent and inflation running below the Fed’s implicit target of 2 percent or a bit below, the Federal Reserve this month announced it would buy an additional $600 billion in Treasury securities.The measure, which comes as official interest rates are already effectively zero, is aimed at lowering borrowing costs and spurring lending, and hopefully to boost hiring in the process.However Lacker, who is not a voter this year on the Fed’s policy-setting Federal Open Market Committee, appeared suspicious of the policy.“At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards,” Lacker told a conference for economics teachers at the Richmond Fed. “The decisions we make at that time will be the true test of whether we’ve learned our lessons.”During the financial crisis, the Fed bought some $1.7 trillion in Treasury and mortgage securities. The increased balance sheet has raised concerns about the Fed’s ability to orchestrate a smooth exit.”At the moment the markets have on a technical basis confirmed that a top is in for this cycle and a move down to the 1000 area on the S&P over the next 6 months is now probably the next step as the new Congress gets in gear.

The 18 ETF Computer Model signals:

Only one change since our 11/10 note. The yen ETF FXY has turned down. Confirmation of a change to Down on the Model for stocks and commodities will take some time to confirm as we go through a bouncy period following the Macro Pattern change.

Long      : DBA,MOO,QQQQ,SPY,SMH,XLY,IYR,IEV,IEF,SHY,GLD,UUP

Neutral : FXE,FXI,XLF,USO

Short     : TLT,FXY

Update at 2:07 PM CST:  The ETF IEF (7 to 10 year Treasury note) just turned short, this indicates that intermediate term interest rates are turning higher, joining the long term bond rates which have been rising.